Brief Australia: Ho Bee Ups Stake In Villa World After AVID Lobs An Offer and more

In this briefing:

1. Ho Bee Ups Stake In Villa World After AVID Lobs An Offer
2. Labour Data May Snap RBA Policy Tension
3. Platinum Asset Management Placement –  Co-Founder Selling + Weak Earnings Momentum
4. Wisetech Global Placement – Past Deal Did Well but Valuations Looks Stretched
5. Resetting the Compass: ASX Model Portfolio Update – March 2019

1. Ho Bee Ups Stake In Villa World After AVID Lobs An Offer

On the 14th March 2019, Australian property developer, Villa World Ltd (VLW AU) announced that it had received an unsolicited proposal, by way of a scheme, from AVID Property Group Australia at an offer price A$2.23, or a 12% premium to last close. 

The offer is conditional on due diligence, unanimous approval of VLW’s board of directors and the receipt of FIRB and other regulatory approvals.

AVID’s indicative offer translates to an LTM PER and P/B of 6.4x and 0.9x, with the P/B metric roughly in line peers.

During 2018, VLW’s share price declined by 36% to A$1.76 from A$2.77, with a large chunk of that downward move occurring in December after VLW withdrew its FY19E earnings guidance. That forecast withdrawal was exacerbated by the fact VLW had maintained the 2019 forward guidance at its mid-November AGM.

Ho Bee Land Ltd (HOBEE SP), VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$1.95/share – and a high of A$2.18/share – lifting its stake to 9.41%. Its stake in VLW accounts for only 1.5% of its market cap. I would not be surprised if Ho Bee is still buying in the market.

VLW announced a 1H19 NPAT of A$17.6mn ($17.3mn) last month – slightly above its $16mn to $17mn guidance – and declared a A$0.08/share franked dividend. Assuming FY19E profit of $27mn, VLW is trading at a not unreasonable 10x PER and an attractive 7.3% yield, one of the highest yields among its peer group, assuming the high-end of the 50-75% payout ratio policy. 

2. Labour Data May Snap RBA Policy Tension

Lower US rates and yields appear to be fuelling broad weakness in the USD and gains in EM assets over the last two weeks.  Global risk appetite is on an improving trend, suggesting hopes are high that easier central bank policies, in the US, China and globally, will stabilise global growth.   Gold continues to pay more attention to lower bond yields, strengthening despite less demand for safe havens. The AUD has firmed in line with stronger global risk appetite, despite increasing expectations that the RBA will cut rates relatively soon.  Never more has the RBA directed the market to pay closer attention to labour market data, raising the stakes around the labour report on Thursday.   Both Australia and Canada have experienced weaker housing markets, credit tightening and surprising economic data setbacks in recent months.  Canadian long term real bond yields have fallen more abruptly, suggesting downside risk for CAD.

3. Platinum Asset Management Placement –  Co-Founder Selling + Weak Earnings Momentum

The co-founder of  Platinum Asset Management (PTM AU), Kerr Neilson, and Judith Neilson are looking to sell 30m shares of the company at a fixed price of A$5.00. 

The deal scores poorly on our framework due to its poor track record, large deal size, weak earnings momentum and relatively expensive valuation. The selldown comes after the company weak 1H FY19 results last month which could put pressure on share price in the near term.

4. Wisetech Global Placement – Past Deal Did Well but Valuations Looks Stretched

Wisetech Global (WTC AU) plans to raise US$177m/AUD250m in order to shore-up its balancesheet for future acquistiions. 

The company has done exceedingly well since listing and even its past fund raising delivered good returns. However, the deal scores a mixed score on our framework as valuations appear strecthed with the stock trading above analysts target price. Thus, the deal might warrant a large discount.

5. Resetting the Compass: ASX Model Portfolio Update – March 2019

• Tracking Benchmark during the Correction and Now looking for Alpha. Our model portfolio has performed in line with the benchmark over the past couple of months, with strong outperformance in January giving way to modest underperformance in February and March.  Our tilt towards Growth drove the outperformance as the Fed announced it would keep policy on hold.  The US yield curve remains positive showing the cycle is not at its end.  Value’s rebound in February and March has been unconvincing and driven by beaten up Consumer Discretionary stocks such as HVN and SUL and low PE defensive plays.
• We Move Overweight Resources and Pull our Banks Exposure Back to Underweight: Key bulk commodity prices are holding up against the Chinese economic slowdown.  But policy is mobilising to reduce the risk of a further sharp slowdown in growth.  The prospect of a rate cut by the RBA is providing a timely boost for the sector via a weaker currency that could be in a sweet spot if global growth has bottomed.
• Cutting Exposure to the Banks. Some uncertainty has now been removed following the release of the Final Report from the Banking Royal Commission and there is some anecdotal evidence that the Banks are returning to the lending business after withdrawing last year, but it’s early days.  Consequently, there seems little upside to low-single-digit EPS growth over the medium-term.  Auction clearance rates in both Sydney and Melbourne remain low and consistent with smaller price declines than last year.  However, the labour market has remained resilient and provides a more positive assessment of economic conditions than the GDP data. 
• Trimming Industrials. We are not trimming our exposure to industrials because we are overly bearish on the domestic economy but because we think it’s best to make room in this sector to build up our Resources barbell.  We remove ABC, DLX, IPL, and ORA and include BIN. 
• Opportunities in the Consumer Space. We add BAL in Consumer Staples and WES in Consumer Discretionary.  There is a risk including BAL into the portfolio, but we think it is positioning itself for strong longer-term growth.  The share price has rallied strongly in the past couple of weeks, but it will need to be supported by approval from China to sell its product.  The performance of A2M shows the opportunity that is on offer.  WES Bunnings business is performing well, despite a weak consumer.  K Mart seems to be performing better than its Big W. 
• Keeping our raised Property Weighting. Property worked well as bond yields rallied last year and while we don’t expect strong returns to be repeated, it is good practice to have an overweight to the sector, given the global economic cycle is mature.  It should continue to provide protection to the portfolio in the event of raised uncertainty.